DSW Fits Shareholders Just Fine

Shoe retailer DSW (NYSE:DSW[1]) sure has a bit of a spring in its step heading into the Thanksgiving holiday.

Shares of the company climbed nearly 9% on Tuesday to extend a pretty steady year-to-date run of more than 50%; DSW now is back near all-time highs around $68 per share.

Unfortunately, with so many investors snatching the stock off the shelf, DSW commands a premium. So is it still worth the impulse buy?

By the Numbers

The huge step DSW took yesterday was thanks to a better-than-expected third-quarter earnings report. Net income fell 7% year-over-year to $50.1 million, but that was partly because the company faced a tough comparison thanks to a non-cash benefit in 2011; higher operating expenses this year also played a role.

However, DSW’s adjusted earnings of $1.02 per share still managed to clobber analyst estimates of 89 cents and the year-ago period’s 88 cents. Revenue also climbed 12% — again, more than the Street anticipated. The company sold $592.7 million of shoes and accessories; analysts expected $12 million less than that. Same-store sales growth of more than 6% was impressive, too.

Of course, it’s hardly just one good quarter. DSW has consistently beat the Street this year, and Q3’s revenue gains marked the 15th straight quarter of improvement. Not bad.

DSW’s full-year forecast didn’t wow, but it was solid. The company expects earnings of $3.30 to $3.40 per share, with analysts’ projections for $3.31 coming in on its low end.

Here to Stay

The wheels of growth keep churning. DSW plans to open 25 to 30 new stores next year to its current tally just above 300 locations. While other warehouse-style stores — like, say, Best Buy (NYSE:BBY[2]) — are eroded by e-commerce, DSW is in a unique position. Shoe sizing is fickle, looks are important and comfort is paramount, thus consumers are practically forced to hit up stores to try first before purchasing.

Also favoring DSW: While shoe producers and designers are subjected to the changing tastes of consumers — sorry, Crocs (NASDAQ:CROX[3]) — DSW’s role on the sales side is much more stable. The company can ride trends right alongside its consumers, stocking its shelves with Steve Madden (NASDAQ:SHOO[4]) and Nike (NYSE:NKE[5]) while they are popular, then trading them out for something else down the road.

Most shoes might go out of style, but shoes in general never will.

But it should be pointed out that one competitive advantage for DSW — its size — also could be a hindrance in the future. The often multi-story square footage of its stores allows DSW to stock an impressive and varied selection … but it’s also more expensive compared to the smaller spaces occupied by Payless and Finish Line (NASDAQ:FINL[6]), which can be squeezed into a corner of any mall or shopping center.

So while DSW’s expansion plans are promising, operating expenses — which ate away at the bottom line last quarter, and in other quarters — could continue to be an issue.

Hardly a Discount

You might be able to find a bargain on this season’s boost styles at DSW, but you’ll be paying full retail on its shares.

DSW’s breakout year has pumped shares up to nearly $70, where they’re trading for nearly 18 times fiscal 2014 earnings. Meanwhile, rival retailers Foot Locker (NYSE:FL[7]), Shoe Carnival (NASDAQ:SCVL[8]) and Finish Line all sport forward P/Es in the 10-12 range.

You’re also not being paid much to wait for the company’s next growth spurt. DSW began paying investors a dividend last year, starting at 15 cents quarterly in December before upping that figure to 18 cents earlier this year — but that’s still only good for a roughly 1% yield. DSW is only paying out 21% of its profits in dividends, though, and also sits on $400 million in cash with no debt on the books, so future increases shouldn’t be an issue. (And, as a note, DSW also paid out a $2/share special dividend in October.)

Bottom Line

There’s a lot to like about DSW, especially if you believe in its ability to consistently grow revenue, and believe that consistency will soon trickle down to the bottom line — and I’m optimistic on both counts.

But personally, I would wait for a markdown before I go shopping.

As of this writing, Alyssa Oursler did not own a position in any of the aforementioned securities.